FCX

Business Context and Reporting Period

Company: Freeport-McMoRan Copper & Gold Inc. (FCX)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 1999
Operations: FCX operates primarily through its majority-owned subsidiary PT Freeport Indonesia (PT-FI) in Indonesia (mining/exploration) and wholly-owned Atlantic Copper in Spain (smelting/refining). The company produces copper, gold, and silver.

Key Financial Metrics (Six Months Ended June 30, 1999)

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 6.8% to $886.2 million (from $830.0 million in 1998) driven by a 15% increase in copper sales volumes and 33% increase in gold sales volumes, partially offset by lower price realizations.
• Profitability Decline: Net income applicable to common stock decreased 30% to $36.7 million (from $52.4 million in 1998). Diluted EPS fell to $0.22 from $0.29.
• Segment Performance:
  • Mining & Exploration: Operating income increased to $246.1 million (from $241.9 million) due to higher volumes.
  • Smelting & Refining: Operating income collapsed to a loss of $2.4 million (from $21.8 million profit) due to lower treatment/refining rates and operational shutdowns at Atlantic Copper.
• Cost Structure: Cost of sales rose due to higher volumes and increased depreciation from the fourth concentrator mill expansion. General and administrative expenses decreased 15% due to cost-reduction initiatives.
• Debt Reduction: Total debt decreased significantly, with net repayments to Rio Tinto totaling $107.5 million and net repayments of other debt totaling $51.2 million.

Guidance, Outlook, and Risks

• Production Outlook: PT-FI projects 1999 sales of approximately 1.4 billion pounds of copper and 2.2 million ounces of gold. 2000 projections are similar for copper (1.4 billion lbs) but lower for gold (1.9 million oz) due to expected lower ore grades.
• Price Sensitivity: A $0.01/lb change in copper price impacts annual revenue by ~$14 million and net income by ~$7 million. A $10/oz change in gold price impacts revenue by ~$21 million and net income by ~$10 million.
• Operational Risks:
  • Indonesia: Political and economic uncertainty following national elections; volatility in the Indonesian Rupiah (hedging covers ~30% of projected payments).
  • Smelting: Atlantic Copper faces soft market rates for treatment and refining charges; excess global smelter capacity is expected to persist.
  • PT Smelting: The joint venture smelter in Indonesia is ramping up and expected to continue incurring operating losses as it reaches design capacity.
• Year 2000 (Y2K): Compliance project is on schedule with estimated incremental costs under $3 million. Contingency plans are in place for supply chain disruptions.
• Legal: Ongoing litigation regarding environmental and human rights claims in Indonesia (Beanal and Alomang cases), though management believes potential liability is not material.

Investor Verification Checklist

• Commodity Pricing: Verify current LME copper and gold spot prices against the $0.70/lb and $253/oz levels cited in the filing to assess impact on the 166 million pounds of "open" copper sales.
• Smelter Margins: Monitor Atlantic Copper's treatment and refining rates, which have declined significantly and are a key driver of the smelting segment's losses.
• Indonesia Stability: Assess the political climate in Indonesia and the stability of the Rupiah exchange rate, given FCX's heavy operational exposure there.
• Debt Servicing: Review the schedule for the mandatory partial redemption of Silver-Denominated Preferred Stock ($11.9 million due August 1, 1999) and ongoing repayments to Rio Tinto.
• PT Smelting Ramp-up: Track the progress of PT Smelting's production ramp-up to determine when equity losses might stabilize or turn to profit.